May 27, 2021
The court found that it could not sanction the scheme, despite the requisite majority of creditors having voted in favour of it. The intervention by the FCA at the sanction hearing marks an interesting development in assessing the extent to which the regulator's views will be aired and considered.
In determining whether the court could exercise its discretion to approve the scheme, Miles J reflected on the general principle that, if creditors approve a scheme by the required majority after having been properly consulted, the court will be reluctant, in exercising its discretion to sanction a scheme, to differ from their decision. The issue was whether the scheme creditors had been "properly consulted". Miles J concluded that they had not been, that the court could not therefore place any reliance on, or give effect to, the votes given in favour of the scheme by the scheme creditors, and that the scheme should not be sanctioned.
Fundamental to the question of whether scheme creditors had been properly consulted was the extent to which they had received sufficiently full or accurate information to enable them to determine whether the scheme was in their interests. The court held that:
- while Amigo had stated that in the absence of a scheme the likely outcome was insolvency, it had provided insufficient evidence to support that position;
- the reasonable likelihood of the directors exploring other restructuring options (while perhaps more obvious to sophisticated creditors) had not (but should have) been properly explained to scheme creditors;
- there was insufficient analysis of (i) why, as a consequence of the scheme, shareholders were retaining the full amount of their equity while scheme creditors were taking a 90% haircut on their claims; and (ii) the basis on which the future payments to scheme creditors had been calculated.
The cumulative effect of the low turnout at the scheme meeting, the limited financial sophistication of the scheme creditors, and the scheme creditors not having been advised or having participated in negotiations with Amigo was also relevant to the exercise of the court's discretion.
It is unusual for a scheme not to be sanctioned, so this judgment is of particular interest and there are some key takeaways:
1. Although the FCA has not typically sought to involve itself in negotiating schemes involving regulated firms, it will take an active role if necessary, even if that potentially puts the success of the scheme at risk to the detriment of the scheme creditors. Scheme companies will need to tread carefully to ensure that their scheme is not objected to by the FCA.
2. It will be interesting to see whether, in schemes involving FCA-regulated firms and redress creditors in the future, a balance can be maintained between (i) the FCA discharging its obligations to oversee such schemes in the interests of redress creditors (e.g. assessing the quality of information/communications) and (ii) creditors and companies retaining the autonomy to conduct the scheme process in a manner consistent with the relevant scheme legislation and common law principles, without the FCA seeking to achieve a substantively improved deal for redress creditors.
3. The balance of power may have shifted in favour of redress creditors as a consequence of this judgment. Query whether, for similar schemes involving unsophisticated creditors where low turnout at the creditors' meeting is expected, companies will take enhanced steps to ensure that the level of "proper consultation" is beyond what is typically required for schemes involving sophisticated parties.
4. In light of what it considered to be an insufficiency of evidence on the point, the court did not shy away from disagreeing with Amigo's firmly held view that, if the scheme was not sanctioned, it would file for administration. While the court would not have reached that (arguably bold) conclusion lightly, it does seem to have laid the ground for the directors to reconsider other scheme options. Amigo is currently "reviewing all options including an appeal" and its next steps will be awaited with interest.